CASE Network Studies & Analyses No.388 -Cost of ...

CASE Network Studies & Analyses No.388 -Cost of Institutional Harmonization in the ENP …

Materials published here have a working paper character. They can be subject to further

publication. The views and opinions expressed here reflect the author(s) point of view and not

necessarily those of CASE Network.

This paper has been prepared under the Workpackage 11 on ‘The costs and benefits of

institutional harmonization’ coordinated by CASE – Centre for Social and Economic Research

CASE Ukraine within the framework of the ENEPO project (EU Eastern Neighbourhood:

Economic Potential and Future Development), financed under the Sixth Framework Programme

of the European Commission, Contract No 028736 (CIT5). Institute for Market Economics (IME -

Sofia) contributed to the Workpackage 11 as a Project Partner.

The content of this publication is the sole responsibility of the authors and can in no way be

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affiliated to.

CASE – Centre for Social and Economic Research CASE Ukraine

Keywords: Institutional harmonization, European integration, European Neighborhood Policy (ENP), economic integration, market access. JEL codes: F15, P33

© CASE – Center for Social and Economic Research, Warsaw, 2009

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The Contents Abstract........................................................................................................................................ 5 Introduction ................................................................................................................................. 6 1. Definition of harmonization costs ......................................................................................... 7

1.1. Direct budgetary costs .................................................................................................... 8 1.2. Direct private corporate costs ...................................................................................... 10

2. Ways of measurement of harmonization-related costs..................................................... 10 2.1 Survey-based approach.................................................................................................. 11 2.2. Econometric modeling................................................................................................... 12 2.3. The Standard Cost Model (SCM)................................................................................... 14 2.4 Impact assessment ......................................................................................................... 14

2.4.1. European Commission Impact Assessment Guidelines ..................................... 15 2.4.2. Ofcom’s approach to Impact Assessment............................................................ 17 2.4.3. Examples of impact assessment ........................................................................... 17 2.4.4. Conclusions on impact assessment methodologies based on a bottom-up casual model...................................................................................................................... 19

3. Review of studies on harmonization costs......................................................................... 19 4. Harmonization costs in the neighboring countries ........................................................... 24

4.1. Methodological steps..................................................................................................... 24 4.2. Areas and the degree of likely harmonization in the ENP countries......................... 24 4.3. Harmonization in Russia ............................................................................................... 34 4.4. Cost of harmonization in the CEE countries ............................................................... 35

4.4.1. PHARE...................................................................................................................... 35 4.4.2. ISPA .......................................................................................................................... 37 4.4.3. SAPARD ................................................................................................................... 38 4.4.4. Estimation of total harmonization cost in the CEE countries ............................. 39

4.5. Estimation of harmonization costs in the ENP countries........................................... 41 5. Conclusions........................................................................................................................... 44 References ................................................................................................................................. 45 Appendixes ................................................................................................................................ 48

Appendix 1 ............................................................................................................................. 48 Appendix 2 ............................................................................................................................. 53 Appendix 3 ............................................................................................................................. 55

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The Author

Veliko Dimitrov is a senior economist at the Institute for Market Economics (IME), Bulgaria. He

has worked at IME since May 2005. Veliko studied International Economic Relations at the

University of National and World Economics, Sofia and has taken several courses in Economics

at Albert Ludwig University, Freiburg, Germany. He has experience in project management,

economic research in various areas, occasional lecturing and participation in public policy TV

and radio debates. He is a regular columnist in several major Bulgarian newspapers and

periodical bulletins published by IME. His main spheres of specialization include the

improvement of the national legislation process, labor market reform, reduction of administrative

burdens, deregulation of economic activity, telecommunications sector regulation, and cost-

benefit analysis.

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Abstract This paper analyzes the costs of (partial) institutional harmonization with the EU acquis which

countries of the former USSR are expected to conduct under their Partnership and Cooperation

Agreements with the EU and European Neighborhood Policy Action Plans. The public sector will

have to take an effort of the transposition and adaptation of EU norms, as well as ensuring that

they are complied with. Yet, the major part of the adjustment costs will fall on the private sector,

as enterprises will have to make substantial investments to comply with new product

requirements and business practices.

In this study we used the method of extrapolation of average costs for CEE countries’

harmonization with acquis to estimate the potential harmonization costs for the neighboring

countries based on internationally comparative macroeconomic indicators like sectoral and total

value added. This involved estimating the EU pre-accession support for the CEE countries by

main areas as a percentage of the total or sectoral value added, determining the expected

degree of limited harmonization in the ENP countries and estimating “coefficients of limited

harmonization”, which was subsequently used for adjustment of the estimated cost of full

harmonization.

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Introduction Institutional harmonization of the EU Eastern neighbors1 towards EU norms is not going to be

without cost both for the public and private sectors in these countries. The public sector will have

to take an effort of the transposition and adaptation of EU norms, as well as ensuring that they

are complied with. Yet, the major part of the adjustment costs will fall on the private sector, as

enterprises will have to make substantial investments to comply with new product requirements

and business practices. It should be stressed that the kind of costs we are trying to estimate are

not the costs born only by the companies exporting to the EU. These are the costs born by all

businesses as they adjust to new norms introduced for the whole economy.

Clearly, the task of estimating such costs would involve tremendous effort, as one would have to

work with company-level information and then sum it up for the whole economy. It is also difficult

to evaluate which investments are made purely due to harmonization with the EU and which will

be made anyway in the process of economic modernization. Moreover, even if one manages to

estimate the magnitude of the initial investments, it is close to impossible to estimate the

implementation costs, as these relate to numerous changes in lives of people and the ways the

companies operate.

One possible way to make the costs estimation for EU Eastern Neighbors would be, first, to look

at the experience of Central and East European (CEE) countries that became EU members and

then to make an extrapolation to account for the situation and the degree of envisaged

harmonization in CIS. In fact, we do follow this route, yet as will be discussed later, such an

approach has its own challenge, namely figuring out the extent to which the neighboring

countries are going to harmonize (as the agenda of their integration with the EU is quite vague

as of the time of writing).

The paper starts with a review of the harmonization costs (Section 1) as well as a discussion of

different ways for measuring them (Section 2). Section 3 presents a review of existing studies on

harmonization costs. Based on it, in Section 4 we suggest an approach to estimate the costs of

harmonization in CIS which must start from defining the areas and the likely degree of

1 Unless otherwise indicated, by neighbouring countries or ENP countries we mean Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine and Russia

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harmonization in each of them. The next step is to find out how much was spent on

harmonization of these areas in CEE. Here, the major source of information are the volumes of

EU assistance on enhancement of institutional capacity and investment in infrastructure –

PHARE, ISPA and SAPARD programs. To obtain the volume of total investment in CEE we

derive coefficients based on the comparison of the EU assistance and total investment for the

sectors where such data is available. Finally, to obtain an estimate for the ENP countries, we

take an average volume of costs in CEE and adjust them for the level of GDP and multiply them

by the coefficient reflecting the degree of harmonization. Sections 5 presents final conclusions.

1. Definition of harmonization costs Based on the surveyed literature and the economic theory we group the cost of institutional

harmonization into two major categories: primary and secondary. Furthermore, costs can be

subdivided into direct budgetary, direct private corporate, indirect budgetary and indirect private

corporate costs.

Table 1. Classification of harmonization-related costs Primary costs Direct budgetary costs – directly paid from the state budget in order to fulfill certain requirements on the governmental level (administrative, regulatory, technical) Direct private corporate costs – directly payable by companies in order to achieve a minimum required level of compliance with a variety of standards and norms Secondary costs Indirect budgetary costs – costs not directly payable by the state budget but emerging due to changes in the institutional environment Indirect private corporate costs –indirect costs for company owners and investors as a result of company failures and bankruptcies

Source: Own summary

Primary costs are the compliance costs in a narrower sense - regulatory, administrative, and

technical. These are expenses at the country or firm level for upgrading existing infrastructure,

equipment and technology, training and capacity building, costs related to amending or creating

legislation, company compliance with various technical standards and regulations like labeling

and packaging, testing, inspections and quarantine requirements, etc. Secondary costs

represent the negative economic impact resulting from alterations. They can emerge in the

public sector (e.g. reduction of tax receipts from certain sectors, subject to restructuring), and in

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the private sector (bankruptcies, output decline due to increased competition or fall in

employment in certain sectors).

This division should not be considered ultimate; it is rather used for explanatory purpose and

clarification of the twofold nature of sustained costs – private and public even though they can

be highly interconnected and dependent upon each other. So, for instance the amount of costs

directly paid from the state budget in order to fulfill certain requirements on the government level

could also mean drop of other activities or increase in taxation, which in turn could lead to less

consumption and/or investments or increase of internal and external debt. Furthermore, purely

private costs like smaller profit and production due to higher competitive pressure could also

lead to higher unemployment, thus less tax revenues and need for the government to spend

more on unemployment benefits, which again could be considered a significant cause for

increase of taxes, etc. Yet, it is important to note that even if some companies might find

themselves forced to decrease production due to higher pressure and more competitors, the

overall impact of harmonization usually brings gains that lead to increase of production and

welfare at a national level. In this chapter we make an attempt to estimate only the direct costs

of harmonization of the ENP countries with no regard to some possible negative implications, i.e.

indirect costs. This is appropriate because generally the negative dynamic impact of policy

changes has to be counterbalanced with all positive effects in order to reveal the net impact and

this paper is focusing only on the cost side of the process (see Maliszewska, Orlova and Taran,

2009 for estimation of net benefits at the national level based on results of CGE modeling).

1.1. Direct budgetary costs Regulatory costs

Institutional harmonization measures may require new legislation or the amendment of existing

laws in accordance with the national legislative and regulatory process of each country. This, in

turn, will involve time and staff specialized in regulatory work both in the line ministries and the

center of government and parliament. Resources required for such legislative and regulatory

work may differ significantly depending on the country's legislative structures, procedures and

frequency of changes in legislation (Moise, 2004).

Upgrade of customs infrastructure, equipment and technology

Equipment and infrastructure are not a prerequisite for trade facilitation measures (as envisaged

in the ENP Action Plans), but some of these measures, such as risk assessment or special

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procedures, are greatly assisted by the availability of appropriate equipment and infrastructure.

Border agencies call for information and communication technology (ICT) products, as well as

infrastructure and scanners, primarily because of their potential to enhance the effectiveness

and efficiency of customs operations and control. Numerous studies show that insufficient

equipment and infrastructure will make trade facilitation measures more difficult to implement

(Moise, 2004).

Training and capacity building

Usually for the introduction of new policy instruments and the harmonization of wide areas of the

economy more civil servants is needed, time is also spent for learning new legislation in details,

which is another factor increasing demand for labor force in public administration. More

specifically, these are costs related to training, increasing a number of civil servant, assuring the

availability of partner-side regulatory bodies for cooperation, time for reorganization of

government structures, etc. Training, even if often perceived as a less significant item in

harmonization agenda, may be costly. According to Moise (2004), the governments can choose

between:

• Recruiting new expert staff (if available);

• Training existing staff in a training center;

• On-the-job training;

• Importing trained staff through personal exchange with other government bodies.

The most commonly observed practice is a combination of (b) and (c). Regular training is a

common practice in many customs administrations, varying only in frequency and duration. On-

job training usually does not involve additional direct budgetary costs, however, it may

temporarily increase costs for traders due to underperformance and incompetence of trainees.

Ideally trade policy capacity building in the neighboring countries should involve research,

training and institutional funding with the aim of further creation of trade-related knowledge and

physical base for trade facilitation and harmonization with EU acquis.

The above-described measures have to be undertaken and financed by the government (or by

international organizations, including the EU) and, to a certain extent, depend upon the

government’s will and readiness to implement them. The direct estimation of their costs is hardly

attainable. First, they depend greatly on how efficiently reforms are carried out, their time horizon

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and organization of public administration. Second, they cannot be clearly separated from

ongoing and future reforms that would take place anyway. For these reasons, in this study, we

will estimate the potential costs in the ENP countries indirectly based on the CEE countries’

experience with the EU pre-accession financial support programs.

1.2. Direct private corporate costs For private entities, the costs of institutional harmonization related to compliance with standards

and regulations. In order to have access to the EU Internal Market, companies in neighboring

countries have to fulfill certain criteria regarding quality of their production, labor standards in

plants and offices as well as to take appropriate measures for environmental protection

according to the EU environmental policy (the last requirements apply now only to EU

companies but in future, due to harmonization, they may also apply to export oriented

companies in the neighboring countries). This means that resources have to be shifted from

production to securing compliance. This involves investing in environmental protection facilities

and equipment, securing more space and appropriate clothing for workers, modernization of

production capacities, introduction of new production technologies, etc. Now, all EU companies,

not only export-oriented ones, are required to comply with the EU norms, otherwise they are not

allowed to sell their products on the EU Internal Market. The number of companies in ENP

countries that will have to comply with EU norms will likely be smaller than in the EU. The

exporting enterprises will have to comply with all EU standards, while other will be subject to the

EU norms and regulations only if these norms are implemented at national level. We expect that

harmonization costs would vary from country to country depending on its current legislation and

administrative and business practices.

2. Ways of measurement of harmonization-related costs Estimation of costs of institutional harmonization is a methodologically challenging effort.

Countries usually do not undertake trade facilitation and institutional harmonization efforts as an

end in itself. Rather, they occur primarily as part of a wider reform effort driven by either a

transition to a market economy, or accession to a regional or sub-regional grouping or a trade

agreement. As a result, there is often no specific allocation of funding for pursuing institutional

harmonization per se, making it very difficult to assess those specific costs.

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There is also no uniform approach in dealing with costs of harmonization in the ENP or CEE

countries. Regarding the latter group, most studies have been prepared by national authorities

or research teams for a respective country and focused on sectoral transformation or adoption of

a single EU directive/standard requirement. The following methodologies have been used most

frequently: survey-based approach, econometric modeling and impact assessment, including

commonly used quantitative techniques. In the next few paragraphs we review these

approaches and assess their strengths and weaknesses.

2.1 Survey-based approach It gives insights into the cost expectations of different categories of agents, time horizon of

implementation or compliance with different requirements in the public and the private sector,

their expected scope, depth, etc. Although there is always concern about the credibility of

survey-based studies, in cases where information is insufficient or the problem to be solved is

too complex, the use of such studies seems to be justified.

Generally, there is a lack of large-scale studies attempting to reveal compliance costs for a

whole economy. Probably the only exception is a World Bank survey, which has been completed

explicitly for the purpose of the assessment of compliance costs of firms facing technical

standards in their potential export markets. The most useful part of the information focusing on

harmonization or compliance cost assessment is shown in Table 2.

Table 2. Total investment costs to comply with technical requirements as a share of sales in three CEE countries (in %)

Country / Indicator Mean Standard Deviation Min Max Bulgaria 2.15 2.52 0.13 9.68 Czech Republic 5.71 9.12 0.05 31.88 Poland 3.84 10.99 0.03 55.65 Total 3.74 8.26 0.03 55.65

Source: Wilson and Otsuki (2004)

With regard to the raw questionnaire-based data of the WB study, the practical use of these

results for the estimation of harmonization costs in other countries (for instance ENP countries)

appears questionable for the reason that the results for the total investment compliance costs

are survey-based and most probably reflect many other country specificities that are not easily

detected and weeded out. The estimation of compliance cost per capita in the three countries

more or less supports the sustainability of the above conclusion.

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Table 3. Compliance costs per capita in the three countries covered by the survey Indicators Countries

Mean of compliance costs as share in company sales

Nominal GDP per capita in US dollars

(2004)

Compliance cost per capita in US

dollars Bulgaria 2.15% 3,096 66.6Czech Republic 5.71% 10,564 603.2Poland 3.48% 6,317 221.7Average 3.74% 6,659 297.2

Source: Wilson and Otsuki (2004), UNCTAD Handbook of Statistics, own calculations

First, the evidence shows that the higher the GDP per capita, the higher the share of the

compliance costs and second, that compliance cost per capita is at significantly lower level in

Bulgaria compared to relatively more economically developed Czech Republic and Poland.

These results are somewhat confusing because intuitively one could think of the need of more

investments in comparatively backward countries since the level of harmonization with EU

standards that has to be achieved is relatively the same across the Union. The results are a bit

controversial as well because part of the costs are bound to international prices (like equipment,

production lines, etc.), which are not likely to be influenced by national conditions, thus the lower

the standard of living, the higher the percentage of compliance costs should be (driven by the

import of special equipment). Given these problems with interpretation of the results, we are

unable to use them in our study. Moreover, they represent only the costs for exporters to the EU,

yet there are other cost categories that have not been covered by this survey, namely, the

compliance costs for all non-export-oriented companies in the case of obligatory harmonization

and the costs for institutional building in the public sector.

2.2. Econometric modeling Using an econometric model or simply linking known costs of harmonization to some observable

economic indicators, a calculation of ENP countries’ harmonization costs (or part of them) is

theoretically possible. There are some studies in the literature that attempt to estimate different

aspects of costs of harmonization, yet this approach is not very popular. Holzinger et al (2006)

uses a regression analysis to estimate the correlation between the EU membership and the

cross-national environmental policy convergence. Although there is no clear estimation of costs

of harmonization or compliance, the findings show a significant correlation between

harmonization with EU standards and environmental policy convergence, i.e. the approximation

to EU acquis will certainly mean an increase of the harmonization costs. Although regression

analysis is not widely used for estimation of harmonization or transition costs, there are also

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other studies and authors that have applied such models. For instance, to estimate costs of

harmonization of the Romanian accounting system with international standards – EU directives

and IAS/IFRS - COTW (2006) tested whether big enterprises and enterprises with double

reporting incur higher implementation costs in absolute terms. The necessary data were

gathered using questionnaires. To estimate correlations between numerical variables a simple

linear regression model was used:

with Ci denoting the cost of implementation by company i, and MCi the market capitalization of

company i. The following main regression results were obtained:

Table 4. Linear regression output Statistics Values

R 0.696R squared 0.484

α0 17,479.552(t) (4.206)α1 0.372(t) (4.311)

Source: COTW (2006)

Based on regression results authors conclude that big companies incur higher implementation

costs. We should point out, however, that R and R squared are on relatively low levels.

The European Institute of Romania has taken a different approach for estimation of the impact of

harmonization (Ciupagea et al, 2004). In the theoretical part, a twofold division of accession or

harmonization costs is introduced. Costs are separated between those generated by institutional

building and formation of human resources and costs related to confirmation with and

implementation of the standards defined by the European norms and policies. Furthermore,

there is a suggestion to distinguish between costs arising in the public and private sector in the

areas like transport infrastructure, labor and social security standards, consumer protection,

quality and environmental standards. To estimate these costs, a macro-economic model is used

(LINK-Dobrescu model), simulating potential changes in major macroeconomic indicators like

GDP, household consumption, employment, etc. (according to two different scenarios – isolation

and integration and in two stages: 2000-2004 and 2004-2015). Although such simulations could

contribute to understanding future perspectives at macro level, they do not solve the cost-

estimation-problem.

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2.3. The Standard Cost Model (SCM)2

The SCM is a method for determining administrative costs for businesses imposed by

regulations, i.e. by legislative changes. It is a quantitative methodology that can be applied in all

countries at different levels. The method can be also used to measure a single law, selected

areas of legislation or to perform a baseline measurement of all legislation in a country.

Furthermore, the SCM is also suitable for measuring simplification efforts as well as

administrative consequences of new legislative proposals and compliance costs at the firm level.

When carrying out the actual measurement in the SCM framework, it is important to get as

detailed data as possible. Not only will this increase the level of accuracy, but it will also ensure

that data can be compared at the disaggregated level. Comparing aggregated data at the

national level may reveal cross-country differences, but this will often not be enough to explain

why there is a difference. In order to explain differences, it is often necessary to be able to

exclude differences in wages and overhead costs, and mainly focus on the differences in time

spent on performing a certain administrative activity. There are several publicly available

applications of the SCM3, yet none of them is closely related to the goal of this paper, i.e.

estimation of costs of ENP countries’ harmonization with EU standards.

2.4 Impact assessment Impact assessment could probably retrieve the most accurate results regarding the forthcoming

harmonization because this method allows the reflection of country specificities, exact scope and

frequency of implementation. Yet the implementation of a bottom-up impact analysis for the

whole country is time- and resource-consuming. In many cases, when analyzing regulations,

governments, private and international organizations conduct an impact assessment – a cost-

benefit analysis that reveals whether legislative requirements are beneficial or not and what will

be their net cost. This way of bottom-up calculation relies on summing up all retrieved results –

costs and/or benefits of a single directive, standard to be adopted or another unit of

harmonization, presenting at the end total investments needed for achievement of compliance in

a whole sector or a subsector. There were impact assessments of harmonization costs with EU 2 More information on the assumptions of the model and the applied approach can be found in Kolesnichenko et al. (2007), Ch. 4. 3 Accessible at: http://www.administrative-burdens.com/default.asp?page=140

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http://www.administrative-burdens.com/default.asp?page=140


norms done in some CEE countries, and below we provide a brief description of two commonly

used Impact Assessment methodologies: the one of the European Commission and of the Office

of Communications in the UK (Ofcom).

2.4.1. European Commission Impact Assessment Guidelines The impact assessment analysis, according to European Commission (2005) guidelines, aims to

predict the likely consequences – both intended and unintended – of implementation of EU

regulations on national level. One of the key objectives of this methodology is enable any non-

specialist to follow the argumentation and understand the positive and negative impacts of each

of the options considered. Analysis is usually carried out in three consequent steps: identification

of environmental, economic and social impacts of a policy or a single requirement, why they

occur and who is affected. The first step is to identify those impacts that are likely to occur as a

consequence of implementing the policy4. A useful approach is to build a casual model – a

bottom-up exercise that starts by identifying the impacts that would arise as a result of the policy

attaining its objectives. These primary impacts can then form the basis for identifying further

rounds of impacts and so on. How far one should develop the casual model is a matter of

judgment (a more detailed analysis makes for greater clarity, yet requires greater investments in

time and effort). Presented below are some possible areas of economic impact and key

questions5 that could be relevant for doing an impact assessment in the ENP countries:

1. Impact on operating cost and conduct of business:

• Will it impose necessity of additional adjustment, compliance or transaction cost

on business?

• Does the option affect the cost or availability of essential inputs (raw materials,

machinery, labor, energy)?

• Will it entail the withdrawal of certain products from the market?

2. Impact on administrative costs on business

• Does the option impose additional administrative requirements on businesses or

increase administrative complexity?

4 Some of the impacts are always intentional and are therefore identified in the form of objectives of the policy to be implemented. 5 They originate from the European Commission Impact Assessment Guidelines and were selected from a set of areas and questions as most relevant in the light of the present study.

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• Do these costs weigh heavily on SMEs (this should be rather an optional

question)

3. Public authorities

• Does the option have budgetary consequences for public authorities at different

levels of government, both immediately and in the long run?

• Does the option require establishing of new or restructuring of existing public

authorities?

The areas and questions represent an example of how the impact assessment works at this

level; they are neither exhaustive nor definitive. Most of these questions can have a quantitative

answer using simple arithmetic and proper information for the respective sector or the economy.

Fundamental limitation of the approach is related to the fact that accurate calculation can be

made when dealing with a single requirement or directive focused on a certain area but not on a

variety of areas combined with many different alterations. More sophisticated quantitative

methods can be used as well. Table 5 presents suitability of the major model types with respect

to the range of the coverage of the measure.

Table 5. Model suitability with respect to the range of coverage of the measure Analysis CGE

models Macroeconometric

models Sectoral models

Single-market analysis without economy-wide impacts X

Single-market analysis with economy-wide impacts X X

Multi-market analysis with effects in secondary markets X X

Source: European Commission Impact Assessment Guidelines

As underlined by the Commission, these models are appropriate for the estimation and valuation

of legislative measures’ impacts on GDP, unemployment, international trade, household income,

etc. We call such effects, as to their negative side, as “indirect costs”. What we need in this

study are the costs borne by private entities in all sectors (or the main sectors, in which

harmonization effort is expected) given a variety of options and costs of institutional building

understood as costs of transformation of existing or creation of new government bodies.

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2.4.2. Ofcom’s approach to Impact Assessment A key principle of Ofcom (2005) Impact Assessment is its proportional character to the impact of

the decision that has to be made. This means that the more wide-ranging the impact on

stakeholders is, the more comprehensive the Impact Assessment should be (the depth of the

analysis naturally depends on the information available as well). According to the Ofcom’s

official guidelines, producing an Impact Assessment normally involves six stages:

• Defining the issue that needs to be considered and identification of citizens’ or

consumers’ interests;

• Definition of the policy objective;

• Identification of possible options of compliance;

• Identification of the impact on different types of stakeholders;

• Identification of any impact on competition;

• Assessing the impact and choosing the best option (if available)

This approach, due to the comprehensiveness of its analytical tools is greatly suitable for the

purpose of the present study. Yet, as evident from the above outlined stages, it is very

demanding in terms of input information – its proper application would require either conduct of

surveys or collection of highly disaggregated data.

2.4.3. Examples of impact assessment The National Program for the Adoption of the Acquis (NPAA) in Slovakia can serve as an

example of application of the impact assessment method. According to the estimation results,

around 4.8 billion Euros were needed for securing compliance with all environmental

requirements (see Table 6). The Government of Slovakia used the Environmental Impact

Assessment6 for the estimation of costs and benefits of different legislative proposals on

harmonization with EU directives and regulations, yet the exact methodology was not described.

The total investments needed have been calculated as a sum of the investments needed in

individual subsectors, which was a data intensive procedure.

6 Act No. 127/1994 on Environmental Impact Assessment, Decree No. 52/1995 of the Ministry of the Environment on the Register of Persons Professionally Qualified for Environmental Impact Assessment

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Table 6: Structure of expenditures for securing compliance with environmental acquis in Slovakia over 1999 – 2008

Sectors Investment (Million EUR)

Non-investment7

(Million EUR) Horizontal legislation 2.07 4,9Air protection 756.34 71,20Waste management 412.54 19,64Water protection 3,388.84 68,75Nature conservation 19.64 7,36Industrial pollution control and risk management 22.09 12,27Chemical substances and genetically modified organisms 12.27 6,14Noise from vehicles and machinery 0.0 2,05Total 4,616.64 192,32Investment + non-investment 4,808.59

Source: Government Office of the Slovak Republic, 2000

Ciupagea et al (2004) cite estimates done for Romania, in particular, for the transport and the

environmental domain both prior and after the accession. There is no clarity about how the

amounts have been estimated, what is known is that they have been provided by the Romanian

authorities – the Ministry of Transport, Construction and Tourism, and the Ministry of

Environment and Water Administration. The estimated total financing needed for acquis

implementation in the transport area amounted to 18,293 million EUR for the period 2004-2013

or 1,829.3 million EUR annually, and 29,523 million EUR for the period 2004-2021 or an

average annual amount of 2,271 million EUR in the environmental area. A detailed breakdown is

presented in Tables 7 and 8.

Table 7. Financing needs estimated for Acquis implementation in the transport sector in Romania (million EUR)

Item Total 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 I. Infrastructure (A+B), out of which: 16,697 478 1,565 1,923 2,591 1,457 1,152 1,275 1,545 1,575 1,412

A. Infrastructure 10,629 245 1,259 1,396 1,650 649 580 817 991 881 899 - Road 0 0 0 0 0 - Railway 8,650 166 1,044 1,188 1,462 492 420 620 849 749 755 - Constanta seaport 344.6 17.5 64 67 90 40 38 18 10 0 0 - Seaports and inland waters 1,206 29 117 115 81 111 116 124 78 78 96

- Aerial 418 33 33 26 7 6 6 54 54 54 48 B. National roads’ rehabilitation 6,068 234 306 526 941 808 572 458 553 694 513

II. Cost of acquis application 1,595 296 277 280 255 198 145 144 0 0 0

Total (I+II) 18,293 775 1,842 2,203 2,846 1,655 1,297 1,419 1,545 1,575 1,412

Source: European Institute of Romania (EIR), according to an estimation provided by the Romanian Ministry of Transports, Constructions and Tourism - http://www.ier.ro/PAIS/PAIS2/En/study12.pdf

7 No clear definition of non-investment costs is provided; we would suggest that these are pure administrative expenditures like filling out or typing documents, inter and intra coordination, communication costs, etc.

18

http://www.ier.ro/PAIS/PAIS2/En/study12.pdf


Table 8. Estimation of environment costs in Romania with the financing sources in the period of 2004 – 2021 (in million EUR)

Out of which: Item Total Total

budget Total EU

funds Total economic

agents Total other

sources Horizontal legislation 9.05 9.01 0.04Air quality 804.28 19.97 3.20 774.51 6.6Waste management 2,474.78 571.48 1,010.18 648.98 244.14Air quality 16,282.06 3,427.84 7,008.88 2,198.34 3,647Industrial pollution control 9,797.64 1,655.26 540.26 6,909.32 692.8Protection of nature 7.32 7.32 Chemicals 29.73 6.23 1.0 22.5 0.0CNCAN 31.80 27.03 4.77Noise 1.15 1.15 Civil protection 85.52 22.43 63.09General total 29,523.32 5,747.73 8,563.52 10,553.64 4,658.43

Source: European Institute of Romania (EIR) according to an estimation of the Romanian Ministry of Environment and Water Administration - http://www.ier.ro/PAIS/PAIS2/En/study12.pdf

2.4.4. Conclusions on impact assessment methodologies based on a bottom-up casual model

• The models allow for a deep analysis on the level of separate activities and therefore, the

estimations could be highly realistic;

• They are suitable for measurement of the impact of single regulations but not process-

related costs in general; at the same time, the detailed approach speaks in favor of applying

the models in small-scale studies;

• The proper application of the models requires both deep knowledge of a country, sector and

subsector specificities and highly disaggregated statistical or sociological data.

3. Review of studies on harmonization costs This section provides a brief overview of several studies that describe major cost categories

related to the EU accession of the CEE countries. In broader sense, we could talk about

institutional harmonization costs. When talking about expenditures related to complying with

various kinds of standards and norms we mean investment expenditures and, in particular,

expenditures on the implementation of environmental protection norms, improvement of sanitary

conditions in food production, costs of increasing safety at work, etc. According to a study

dealing with costs and benefits of Poland’s EU integration (CEN, 2003), these and similar types

19



of expenditures should not be treated as costs, but as investments (even when considering short

or medium term). The authors stress that labeling the expenditures related to adaptation of

acquis, as costs of accession to the EU is a misunderstanding. It is pointed out that those

measures and the related costs bring important – although hardly measurable – benefits for the

society such as clear environment, good health and fewer incidents at work.

Another study (Tupy, 2003) takes a different point of view. Although the accession of CEE

countries brings important benefits (or more precisely creates conditions for them) such as

reduced barriers to trade and investment, completely free movement of labor by 2010 – 2013

and economic liberalization in some sectors, it also accounts for stringent environmental,

sanitary, etc. regulations, which are generally costly and represent a significant entry barrier

especially for the SME sector (solely complying with environmental standards is estimated to

impose a cost of up to 120 billion euro on the eight CEE countries that joined the EU in 2004).

The European Commission (2001) also expected that the environmental legislation alone will

cost between 2 and 3% of annual GDP of CEE countries during the transition period of five to

seven years.

Angelov (2001) discusses the cost of Bulgaria’s compliance with EU acquis regardless of source

of their financing – domestic private or public, FDI or external borrowing. It amounted to 25-35%

of the overall investment needs before accession or in real terms about 15 billion EUR (6% of

the annual GDP for 20 years). His estimation also show that for compliance with EU regulations

in the transport sector the CEE countries had to invest over 90 billion EUR, with a figure for

Bulgaria of 5.3 billion EUR. According to estimation of the European Commission (2001), for

achievement of environmental standards alone, the CEE countries that joined in 2004 needed

122 billion EUR.

The above figures should not to be taken exactly – first, it is very difficult to anticipate the overall

volume of investment and second, if some investments are easier to identify for each group,

others are more difficult. For instance, environment protection standards could be met not only,

and not even mainly, by cleaning and protective equipment, but rather by modern energy saving

and environment friendly technologies. Some authors (CEN, 2003) suggest that costs or losses

incurred by particular sectors could be considered as adaptation costs that accompany the

process of structural change and compliance related to the accession to the EU. Therefore,

negative sectoral effects, which in the end turn to be positive for the economy as a whole, and

20


which are unavoidable in a long-term perspective, should not be treated as costs of

harmonization, but instead considered as expenses on modernization.

There are also studies that look at the indirect costs of harmonization that fall on the economy

as a whole. So Tupy (2003) shows that all kinds of additional regulations that have to be

implemented should be seen as a job-killing factor, i.e. an indirect cost. Following his research,

most of the EU regulations that prevail nowadays were developed to suit the need of the society

for social justice, consumer protection and environmental preservation. Yet, in the case of less

developed countries these regulations may hamper higher growth rate and job opportunities.

Table 9 demonstrates that less business regulation guarantees lower unemployment rate.

Table 9 Regulatory environment and level of unemployment in EU15, Norway and USA

Country Business freedom* - 2007** (%)

Unemployment rates (%) – 2006

Norway 97.0 3.5 Denmark 95.3 3.9 Netherlands 88.3 3.9 Ireland 92.8 4.4 United States 94.5 4.6 Luxembourg 90.0 4.7 Austria 79.8 4.7 United Kingdom 92.1 5.3 Italy 73.7 6.8 Sweden 95.0 7.1 Finland 95.3 7.7 Portugal 79.6 7.7 Belgium 90.8 8.2 Spain 77.1 8.5 Greece 70.2 8.9 France 86.1 9.2 Germany 88.2 9.8

* The ability to create, operate and close an enterprise quickly and easily. The indicator measures how burdensome regulatory rules are. ** Calculated with data for 2006

Source: Eurostat, Index of Economic Freedom (2007), own summary

21


Figure 1: Unemployment and Business Freedom

Unemployment and Business freedom

0

2

4

6

8

10

12

60 65 70 75 80 85 90 95 100

Business freedom

Une

mpl

oym

ent (

%)

Source: Eurostat, Index of Economic Freedom (2007), own summary

The same is demonstrated by Figure 1: a negative correlation between the score of business

freedom and the unemployment rate (yet, the number of outliers is significant as well). However,

one must remember that unemployment rate is also dependent on labor market regulations,

monetary and the fiscal policy, etc. There is also evident that within the EU there is a different

level of freedom and each country can determine its own internal economic policy and

regulations (because the EU directives leave a great room of flexibility of how they can be

transposed into a national legislation). In particular, higher standards and intense competition

may drive some companies and even industries out of business, which is going to lead to a rise

of unemployment, yet this effect will certainly not hold in the long run. Moreover, all negative

effects can be mitigated thanks to labor migration not only within a country, but also between

countries.

Table 10 summarizes the results obtained in various studies and official documents dealing with

the expected cost of harmonization in the agricultural, environmental and transport areas in the

EU candidate countries.

22


Table 10. Costs of compliance with EU standards according to different studies Country/ Indicator Agriculture Environment Transport Bulgaria Total investment costs – 2.15% of domestic company’s sales (Wilson and Otsuki, 2004)

- 15 billion EUR (Angelov, 2001); - 8.6 billion EUR (EC, 2001);

- 11.7 – 15.0 billion EUR (IIASA, 1999)

5.3 billion EUR (Angelov, 2001)

Cyprus 1.1 billion EUR (EC, 2001) Czech Republic Total investment costs – 5.71% of domestic company’s sales (Wilson and Otsuki, 2004)

- 6.6 – 9.4 billion EUR (EC, 2001);

- 10.4 – 13.4 billion EUR (IIASA, 1999)

Estonia - 4.4 billion EUR (EC, 2001); - 1.5 billion EUR (IIASA, 1999)

Hungary - 4.1 – 10 billion EUR (EC, 2001); - 10.4 – 13.4 billion EUR (IIASA,

1999)

Latvia - 1.5 – 2.4 billion EUR (EC,

2001); - 1.71 billion EUR (IIASA, 1999)

Lithuania

2-2.5% of GDP (205 million EUR from

SAPARD in the period 2000-06, accounting for 75% of the total cost) (CEPS, 2006)

- 1.6 billion EUR (EC, 2001); - 2.38 billion EUR (IIASA, 1999)

Poland Total investment costs – 3,84% of domestic company’s sales (Wilson and Otsuki, 2004)

2-2.5% of GDP (172 million EUR annually, representing 75% of

the total cost); (CEPS, 2006)

- 30.4 billion EUR in 1999 (CEN, 2003);

- 22.1 – 42.8 billion EUR (EC, 2001);

- 34.1 – 35.2 billion EUR (IIASA, 1999))

Romania 538 million EUR (Ciupagea et al.,,

2004)

- 22 billion EUR (EC, 2001); - 29.5 billion EUR (Ministry of

Environment of Romania); - 20.2 – 22.0 billion EUR (IIASA,

1999)

18,3 billion EUR (Ciupagea et al., 2004) *

Slovakia

- 4.8 billion EUR (EC, 2001); - 4.8 billion EUR (NPPA, 2000) - 4.1 – 5.4 billion EUR (IIASA,

1999)

3.5 billion EUR (NPAA, 2000)

Slovenia - 2.4 billion EUR (EC, 2001); - 1.84 billion EUR (IIASA, 1999)

CEE countries

- 79 – 120 billion EUR (estimation of the European Commission); - 78 – 85 billion EUR (IIASA,

1999)

90 billion EUR (Angelov, 2001)

Sources: CEPS, IFW, ICPS, European Commission, CEN, BAS, NPAA Slovakia, EIR, IIASA, The World Bank, own summary, * Information initially provided by the Romanian Ministry of Transport, Construction and Tourism

23


4. Harmonization costs in the neighboring countries

4.1. Methodological steps For purpose of measuring the potential harmonization costs in the ENP countries we decided to

use costs incurred by other countries as a benchmark and then adjust them for ENP countries

specifics. This approach is less reliable than the impact assessment and could be less or more

reliable in comparison with the survey-based method depending on the latter’s quality, depth

and coverage. However, difficulty in conducting an impact assessment for the ENP countries

and the lack of appropriate questionnaire-based data, has limited our choice8.

As the first step, we defined the major areas of harmonization of the ENP countries and their

respective degree. The next step was to find out costs of harmonization in these areas in the

CEE countries, in order to work out a relationship to an observable macroeconomic indicator,

which we can use later for the estimation of such costs in the neighboring countries. Here, the

major source of information was the volumes of EU assistance on enhancement of institutional

capacity and investment in infrastructure and agriculture – PHARE, ISPA and SAPARD

programs, including national co-financing. Yet, the resources allocated under these programs

represent only a part of all harmonization-related costs in the CEE countries, therefore to obtain

the volume of the total investment, we derive coefficients based on the comparison of the EU

assistance and total investment for the sectors where such data is available (see Table 10).

Finally, to obtain an estimate for the ENP countries, we take an average volume of costs in CEE

and adjust them for the level of GDP and multiply them by the coefficient reflecting the degree of

limited harmonization.

4.2. Areas and the degree of likely harmonization in the ENP countries

In this section we review major types of activities and economic sectors that the neighboring

countries are supposed to harmonize according to the provisions of the ENP Actions Plans and

the Partnership and Cooperation Agreements (PCAs)9. These activities are of different nature,

8 The research team decided not to use regression analysis due to limited number of observations 9 Original texts are accessible at: http://ec.europa.eu/external_relations/ceeca/pca/index.htm

24

http://ec.europa.eu/external_relations/ceeca/pca/index.htm


yet most of them are crucial for trade facilitation, ensuring better market access and closer

integration in energy and transport sectors. In particular, the rules to be harmonized fall into the

following areas: agriculture and food safety, competition, customs, employment and social

policy, environment, external trade, internal market (free movement of people, single market for

goods, single market for services, free movement of capital), company law, public procurement,

intellectual property rights, transport and energy policy10. Furthermore, we have attempted to

define the degree of limited harmonization for the neighboring countries as envisaged in the

ENP strategic papers.

Internal market:

Free movement of people – abolishment of all discriminatory measures based on nationality of

migrant workers in respect to working conditions, remuneration and dismissal.

The rules related to free movement of EU citizens within the Union, Schengen information

system, penetration of external borders, visas, asylum, immigration, rights of non-EU nationals,

relations with non-EU member countries, recognizing qualifications, skills and mobility and social

protection of workers will not be harmonized.

Single market for goods – gradual removal of all export and import restrictions according to the

PCAs, gradual liberalization of trade in steel products and gradual removal of export duties on

ferrous scrap and voluntary harmonization with EU technical requirements.

An explicit harmonization is not to be expected in respect to consumer health, including

genetically modified organisms, quality of goods and services, community patents,

biotechnological inventions, duty free treatment, management of pollution and waste, energy

efficiency and the general rules establishing the Single European Market.

Single market for services - Removal of obstacles identified, taking into account WTO services

commitments, effective implementation of legislation setting out basic principles of non-

discrimination, compliance with the recommendation of the International Monetary Fund,

independent and well-trained supervisory authorities in accordance with internationally

10 In a few cases there are rules that apply to more than one area.

25


recognized standards, as well as effective implementation of adequate company law, accounting

and governance rules.

No explicit harmonization is expected regarding recognition of qualifications, “Services”

Directive, competitiveness of services related to businesses, liberal professions, inland

navigation, intra-Community air routes, postal services, etc.

Free movement of capital – free movement of capital related to direct investments or other

investments made in accordance with the provisions of the PCAs, protection of foreign

investments as well as to liquidation or repatriation of these investments and of any profits

resulting from them.

No explicit harmonization is expected regarding the free movement of capital and the relations

within the Union, consumer credit, actions for injunctions, common taxation of parent companies

and their subsidiaries, indirect taxes on raising of capital, Statute for a European Company,

Investor compensation schemes and late payments.

Other horizontal areas:

Food safety - legislative approximation in the sphere of food hygiene, including food

processing, convergence with EU food traceability legislation, general food safety principles and

requirements (Regulation (EC) No 178/2002), implementation of the Hazard Analysis Critical

Control Point system at enterprises and controlling bodies, including the fish industry.

No explicit harmonization is expected to take place regarding labeling, presentation and

advertising of foodstuffs, deregulation of pack sizes, prices of products offered to consumers,

frozen food, genetically modified organisms, novel foods and novel food ingredients, nutrition

and allergens, foods for infants and young children, food packaging and containers, imports from

third countries and intra-community trade, genetically modified feeding stuffs, animal waste and

pathogenic agents, etc.

Competition – state aid policy, anti-trust legislation, control regimes.

26


No explicit harmonization is foreseen regarding calculation of fines, immunity from and reduction

of fines, information on infringements and complaints, exemptions of agreements of minor

importance as well as the competition rules applicable to specific sectors: agriculture (state aid

in the agricultural sector, state aid to small businesses), postal services and

telecommunications.

Customs – general legislation aligned with the international practice, adoption of the

harmonized system in use, risk based customs control, well-trained customs officials

No harmonization is expected to take place regarding the Community customs code, the

Common Customs Tariff and the Integrated Tariff, customs check and exemptions at internal

and external borders, the specific schemes and the agreements with third countries.

Employment and Social Policy – closer approximation to EU practices, non-discriminatory

treatment of migrant workers, trade unions’ rights and core labor standards based on European

standards

No explicit harmonization is foreseen regarding the partnership for growth and employment, the

legal instruments for Community employment policies, incl. the quality of employment as well as

reporting and statistics, job creation measures, social protection, third-country nationals,

organization of working time, cross-industry social dialogue, protection of specific groups of

workers, the workplace, the female employment and entrepreneurship, etc.

Enterprise – national registration system for companies, based on best practice in EU Member

States, non-discriminatory, transparent and predictable business conditions, adoption and

implementation of a system of impact assessment of regulatory measures, consultation of

stakeholders, and prior notification of regulatory changes to economic operators, developed

domestic securities markets and improved regulatory and supervisory framework for non-bank

financial institutions, approximation of legislation on liability for defective products and general

product safety, consolidated and strengthened market surveillance capacities of state institutions

based on best practice of EU Member States.

No explicit harmonization is to be expected in the areas of small and medium-sized enterprises,

multiannual program for enterprises and entrepreneurship, financing, corporate social

27


responsibility as well as regarding the rules for specific industries like automobile, chemical,

pharmaceutical, textile industry and tourism.

Environment - Strategic planning of environment issues and co-ordination between relevant

actors, establishment of procedures regarding access to environmental information and public

participation, structures and procedures to carry out environmental impact assessments,

implementation of the provisions under the Kyoto Protocol, and the UN Framework Convention

on Climate Change.

No explicit harmonization is expected regarding biodiversity, genetically modified organisms,

management of specific soil types, discharge of substances, civil protection measure, noise

management and the cooperation with third countries.

External trade – Gradual removal of restrictions and non-tariff barriers that impede bilateral

trade and implementation of the necessary regulatory reforms, gradual liberalization of trade in

steel products and gradual removal of export duties on ferrous scrap, harmonization of the

remaining import licensing and registration requirements with those of the EU, removal of the

existing discriminative measures against imported products in terms of measures covering the

weight, composition, labeling manufacture and description of products (see also customs).

Harmonization will not take place in respect to export credit insurance rules, dual-use items and

technology, exports of cultural goods, rules for imports from certain non-EU member countries,

anti-dumping measures, anti-subsidy measures, defense against trade barriers, etc.

Public procurement - approximation to the EU legislation on procurement for goods, services

and works across all relevant public bodies at all levels, open and competitive award of

contracts, in particular through calls for tenders, possibility of independent/ judicial review in the

event of disputes and effective dissemination of tendering opportunities and time-limits (above

agreed thresholds), which allow EU as well as domestic suppliers to prepare and submit

tenders.

Sectors:

28


Transport - National sustainable transport policy for development of all transport modes,

coherent with the EU’s White Paper on transport, infrastructure policy in order to identify and

evaluate the priority projects in various sectors, co-operation in satellite navigation (including

joint research actions and applications), improved efficiency of freight transport services

(including issues of border crossing procedures), incl. multi-modal services and address issues

of interoperability, implementation of relevant international IMO (International Maritime

Organization) conventions.

Harmonization is not expected in respect to carriage of passengers, employment and working

conditions, technical harmonization of motor vehicles, inland waterways navigation, the Single

Sky and air traffic management, biofuels, passenger rights, intelligent transport systems,

European space policy and regarding rules applicable to anti-trust and state aid legislation in

transport.

Energy - gradual convergence towards the regulatory principles of the EU internal electricity

and gas markets, including price formation, participation in EU related energy events as

appropriate, including gradual involvement in the European Gas and Electricity Regulatory fora,

increased performance of networks and reduction of network losses (oil, gas, electricity),

increased performance, safety and security of the gas transit networks, restructuring of the solid

fuels mines, compliance with the internationally accepted nuclear safety standards, accession to

the agreement concluded with EURATOM on peaceful uses of nuclear energy and the adoption

of a nuclear waste strategy.

No explicit harmonization is foreseen in the areas of climate change, greenhouse gas emission

allowance trading scheme, energy taxation, European Strategic Energy Technology Plan,

sustainable power generation from fossil fuels, “Intelligent Energy – Europe” program for

innovation and competitiveness.

As previously indicated, the institutional harmonization in the neighboring countries will not be

equally distributed among sectors, primarily focusing on trade in goods and important

infrastructure sectors like energy and transport, with a rather limited scope of harmonization in

services and agriculture. According to the ENP Action Plans and the Partnership and

Cooperation Agreements, foreseen harmonization measures and objectives are very similar

29


across countries, with the exception of some country specificities like nuclear power plants,

hazardous areas, etc.

Although the agenda is generally quite wide in scope and concrete efforts undertaken by each

country may differ even if final goal is the same, this similarity makes the assessment of cost

and benefits of the integration easier, allowing the use of a uniform approach. On this basis we

found it appropriate to treat all countries equally, attempting also to assign to each area a

separate coefficient representing the expected degree of limited harmonization. Estimates of the

harmonization-degree-coefficients provided in Table 11 are based on the arbitrary authors’

judgment after studying EU policies in each area and measures foreseen in the ENP strategic

documents, as summarized above.

For example, in the public procurement area harmonization will encompass the establishment of

open and competitive award of contracts in all areas – goods, services and construction works,

possibility of independent review in the event disputes and effective dissemination of tendering

opportunities and time-limits. On the other hand, no explicit harmonization is expected to take

place in the public awarding in the water, energy, transport and postal services sectors, defense

procurement, e-Government measures, public procurement partnerships and concessions under

the Community law.

The number of public procurement areas to be and not to be harmonized is generally the same

for all ENP countries, yet the first category encompasses more general and wide-ranging

measures, i.e. presumably more resource-intensive while the second one consists of specific

and some sector-oriented measures, i.e. presumably as a weighted share in the public

procurement area as a whole and all harmonization-related costs, their value would be less than

50%. For this reason, we decided to assign a limited-harmonization-coefficient to the public

procurement area of 0.75. Indeed, this approach could be only a very rough measure for the

harmonization efforts across areas, yet the large scale of the study does not allow any closer

examining of each domain and the application of more sophisticated metrics.

Table 11 shows the most relevant EU policy areas and activities as well as an assessment of the

degree of institutional approximation of the ENP countries.

Table 11. Evaluation of ENP countries’ foreseen harmonization

30


Areas Expected harmonization in ENP countries, by subareas Coefficient of harmonization

[0;1] (1=full harmonization)*

Agriculture / Food safety

- Legislative approximation in the sphere of food hygiene, including food processing (see “Food Safety”); - Convergence with EU food traceability legislation, general food safety principles and requirements (Regulation (EC) No 178/2002); - Implementation of the Hazard Analysis Critical Control Point system at enterprises and controlling bodies, including the fish industry.

0.15

Competition

- State aid policy compatible with that of the EU; - Prohibition of state aids which distort trade; - Adequacy and compatibility with the EU, of the domestic anti-trust legislation and control regimes.

0.5

Customs

- Customs legislation aligned with international and EU standards; - Adoption of the Harmonized System in use, with a view to adopt the Combined Nomenclature in the longer term, as agreed in the PCA; - Risk based customs control and set the necessary organizational framework; - Customs-related legislation: provisions on customs control of precursors, counterfeit and pirated goods, dual use goods, and cultural goods; - Well-trained customs officials, higher computerization of the customs administration and upgraded Customs laboratories.

0.4

Employment and Social

Policy

- Closer approximation to EU standards and practices in the area of employment and social policy; - Non-discrimination of migrant workers on a ground of nationality; - Trade unions’ rights and core labor standards based on European standards and in accordance with relevant ILO conventions; - Effective employment creation and poverty reduction; - Sustainable systems for education, health and other social services with access for all.

0.1

Energy

- Gradual convergence towards the principles of the EU internal electricity and gas markets; - Price convergence of the neighboring countries’ and the EU markets; - Participation in EU related energy events as appropriate, including gradual involvement in the European Gas and Electricity Regulatory fora; - Increased performance of networks and reduction of network losses (oil, gas, electricity); - Increased performance, safety and security of the gas transit network; - Restructuring of the solid fuels mines; - Compliance with the internationally accepted nuclear safety standards; - Accession to the agreement concluded with EURATOM on peaceful uses of nuclear energy; - Adoption of a nuclear waste strategy.

0.7

Enterprise

- Implementation of a national registration system for companies, based on best practice in EU Member States (possible accession to the European Business Register); - Non-discriminatory, transparent and predictable business conditions, simplified administrative procedures and fight against corruption; - Adoption and implementation of a system of impact assessment of regulatory measures, consultation of stakeholders, and prior

0.2

31




notification of regulatory changes to economic operators; - Privatization program, including large-scale privatization, and increased transparency of the process; - Reduction of the involvement of the state in setting prices; - Strengthening banking regulation and supervision; - Developed domestic securities markets and improved regulatory and supervisory framework for non-bank financial institutions; - Harmonization of the necessary framework and sectoral legislation with the EU technical regulations in the priority sectors (priority sectors not stated); - Transparent and predictable regulatory environment for the economic operators; - Approximation of legislation on liability for defective products and general product safety; - Gradual simplification of procedures of conformity assessment of industrial products, in accordance with the requirements of the Technical Regulations (EU Directives), and with the objectives of avoiding compulsory certification of non-risk products and multiple testing of products; - Consolidated and strengthened market surveillance capacities of state institutions based on best practice of EU Member States.

Environment

- Strategic planning of environment issues and co-ordination between relevant actors; - Waste management and water protection; - Establishment of procedures regarding access to environmental information and public participation, including implementation of Aarhus Convention, particularly by establishment of structures and procedures for ensuring an acceptable level of service to those wishing to have access to information; - Structures and procedures to carry out environmental impact assessments, including in relation to trans-border issues; - Implementation of the provisions under the Kyoto Protocol and the UN Framework Convention on Climate Change; - Possible participation in selected European Environment Agency activities.

0.4

External Trade

- Gradual removal of restrictions and non-tariff barriers that impede bilateral trade and implementation of the necessary regulatory reforms; - Gradual removal of all export and import restrictions according to the PCA; - Gradual liberalization of trade in steel products and gradual removal of export duties on ferrous scrap; - Harmonization of the remaining import licensing and registration requirements with those of the EU; - Removal of the existing discriminatory measures against imported products in terms of measures covering the weight, composition, labeling manufacture and description of products; - Full and effective implementation of most favored nation and national treatment.

0.6

Internal Market – 0.55 on average - Free

movement - Full application of the best endeavor clause by abolishing all discriminatory measures based on nationality which affect migrant 0.3

32




of people workers, as regards working conditions, remuneration or dismissal.

- Single market for

goods

- Gradual removal of all export and import restrictions in the spirit of the PCA; - Gradual liberalization of trade in steel products and gradual removal of export duties on ferrous scrap.

0.85

- Single market for services

- Removal of obstacles identified, taking into account WTO services commitments; - Effective implementation of legislation that sets out basic principles of non-discrimination and introduction of more detailed secondary or sector-specific legislation where necessary; - Compliance with the recommendations of the IMF's Financial Sector Assessment Program (FSAP) of November 2003; - Effective implementation of independent and well-trained supervisory authorities in accordance with internationally recognized standards; - Effective implementation of adequate company law, accounting and governance rules.

0.3

- Free movement of capital

- Free movement of capital related to direct investments or other investments made in accordance with the provisions of the PCAs; - Protection of foreign investments as well as liquidation or repatriation of these investments and of any profits stemming there from.

0.65

- Company law

- Adoption and implementation of effective competition and bankruptcy legislation; - Abolishment of discriminatory measures affecting the operation of EU companies; - Full and effective implementation of most favored nation and national treatment; - Progressive removal of restrictions on company establishment; - Improved competences and independence of auditors.

0.2

- Public procurement

- Approximation to the EU legislation on public procurement. These principles should apply to procurement for goods, services and works across all relevant public bodies at all levels; - Open and competitive award of contracts, in particular through calls for tenders; - Ensure the possibility of independent/judicial review in the event of disputes; - Effective dissemination of tendering opportunities and time-limits (above agreed thresholds), which allow EU as well as domestic suppliers to prepare and submit tenders.

0.75

- Intellectual property

- Level of protection similar to that in the EU, including effective means of enforcement; - In particular, legislation on trademarks and geographical indications sanctions for infringements of intellectual and industrial property rights, effective measures against counterfeit/pirated goods in specifically targeted sectors.

0.8

Transport

- National sustainable transport policy for the development of all transport modes, coherent with the EU’s White Paper on transport; - Infrastructure policy in order to identify and evaluate the priority infrastructure projects in various sectors and continue participation in the joint development of the Pan-European Corridors and Areas as well as in the TRACECA program; - Co-operation in satellite navigation (including joint research actions

0.3

33




and applications); - Introduction and enforcement of mandatory driving times and rest periods in the international transport sector complying with international standards; - Adoption of an action plan for improving road safety; - Improved efficiency of freight transport services (including issues of border crossing procedures), incl. multi-modal services and address issues of interoperability; - Obtaining a full member status in the European Joint Aviation Authorities (JAA); - Implementation of relevant international IMO (International Maritime Organization) conventions.

* No exact formula is used; the numbers are chosen based on the author’s own expert assessment.

Source: European Commission, EU/ENP partners Action Plans, Partnership and Co-operation Agreements, own summary; Belarus is excluded because it has not signed an Action Plan.

4.3. Harmonization in Russia Russia is an important geopolitical, security and trade partner of the EU and its largest neighbor.

Although Russia’s engagement with the EU is aimed more towards building a strategic

partnership and cooperation in diverse areas rather than unilateral harmonization, the coverage

and the essence of this cooperation is quite close to what is being done in the context of the

ENP, especially in the economic domain. EU-Russia relations draw on a large spectrum of

particular EU policies, including the Common Foreign and Security Policy, trade policy, external

aspects of EU general policies such as energy, transport, environment and the external

dimension of freedom, security and justice affairs.

The provisions of the PCA also cover a wide range of policy areas including political dialogue,

trade in goods and services, business and investment, financial and legislative cooperation,

science and technology, education and training, energy, nuclear and space cooperation, etc. At

the St. Petersburg Summit in 2003 EU and Russia agreed to create four common spaces in the

framework of the PCA – common economic space, common space of freedom, security and

justice, space of cooperation in the field of external security and a common space of research

and education.

There are also ongoing negotiations on Fishery Agreement, Energy Charter Treaty, agreement

for trade in nuclear materials, the Kyoto Protocol, agreement for nuclear safety and nuclear

fusion, EU-Russia action plan on combating organized crime, agreement on satellite navigation

34


(Galileo/Glonass), etc. As result, these various forms of cooperation may certainly bring EU and

Russia closer in terms of policies and formal rules. The project team believes that there are

enough reasons to estimate the potential harmonization costs for Russia in the same way they

are calculated for ENP countries. This will also guarantee higher accuracy in cross-country

comparisons.

4.4. Cost of harmonization in the CEE countries

The volume of the EU pre-accession assistance to the CEE can serve as an indicator of the

costs of harmonization, as the EU financed a big part of them. The three main programs that

financed institutional and infrastructural harmonization in CEE were PHARE, ISPA and

SAPARD.

4.4.1. PHARE The PHARE program funded modernization of CEE counties for over a decade. In 1997 and

1999 it was modified to meet better the requirements of accession and prepare EU candidates

for absorption of the Structural Funds. It was designed to meet the following six main broad

objectives:

• Strengthening the public administration and judiciary at all levels;

• Improving transparency, financial control and the fight against corruption and fraud;

• Promoting economic growth, competitiveness and social cohesion;

• Integration of minority and vulnerable groups into mainstream society and the creation of

more dynamic and pluralistic civil society;

• Improvement of the administrative and judicial capacity to implement and enforce

legislative measures and assume obligations of the EU membership;

• Improvement of the strategic planning and effective utilization of EU funds.

Although PHARE was generally not sector-oriented like ISPA or SAPARD, there have been

many projects undertaken to support development of specific sectors of the EU accession

economies. Those initiatives and PHARE funds depended on national sector performance and

thus no general rule of distribution can be devised.

35


In the Bulgarian agricultural sector, for instance, PHARE projects aimed at the improvement of

phytosanitary control and plant protection, mainly through training of experts on different control

mechanisms and methods, on improvement of veterinary control through supporting the

alignment of legislation and control systems and on the establishment of adequate border

veterinary control measures. What concerns the environmental sector in Bulgaria, there were

projects providing assistance for the closure of Eleshnitsa uranium mines, improving the

administrative framework and institutional capacities necessary for implementation and

enforcement of the Seveso Directive, etc.

In Romania’s transport sector, several projects were implemented for improvement of traffic

safety infrastructure, e.g. the rehabilitation of a railway-testing centre and the completion of the

interlocking systems in three main railway stations, a river information system on Danube and a

video surveillance system on the national road no. 1. In the environmental sector, there were

PHARE projects focused on the cost assessment and the preparation of a financial strategy for

the so-called “heavy investment” directives, development of an environmental administration

capable to cope with relevant EU requirements, including compliance with industrial pollution

and Water Framework Directives. PHARE funds were generally allocated to several different

areas and for various different objectives – administrative capacity improvement, internal market,

agriculture, energy and nuclear safety, employment, social affairs and health11.

The most comprehensive data on distribution of PHARE funds across areas and countries,

including nuclear decommissioning, is available for the years 2001 and 2003. Based on this

information an average distribution of the total funds is calculated (see Table 12).

Table 12. Distribution of PHARE commitments by areas and countries (1990 – 2004), EUR millions12

Administrative capacity

Internal market Agriculture Transport

Energy and

nuclear safety

Environment Employment, social affairs and health

Bulgaria 362.0 - - - 756.3 - 480.3 Czech Republic* 365.8 48.6 - - 26.3 - 491.4

11 In our analysis some areas are omitted, due to their minimal or no relevance to the harmonization process in the ENP countries, for example, justice and home affairs, internal statistical issues, regional policy and internally managed community programs. 12 We have the total (1990-2004) PHARE allocation across countries but not across areas; to estimate the latter we take the average allocation for 2001 and 2003 across areas (as provided in Appendix 1) and assume that it is the same or similar for the whole period.

36


Administrative capacity


Energy and

nuclear safety


Estonia 85.7 48.6 89.8 - - 48.6 32.1 Hungary 735.7 81.9 124.3 71.1 8.8 81.9 97.9 Latvia 62.4 57.9 15.2 - 12.7 - 32.4 Lithuania 66.9 29.5 73.3 9.6 376.2 20.7 11.9 Poland 601.4 228.0 365.6 - - 129.7 1 639.2 Romania 242.3 29.9 - - 13.6 108.9 1 179.1 Slovakia* 33.5 27.8 29.4 - 278.6 13.1 117.6 Slovenia 26.4 44.7 - - 7.0 - 98.2

* The funds provided to former Czechoslovakia (EUR 230 millions) are equally divided between the Czech Republic and Slovakia

Source: Official reports of the European Commission, own summary and calculations

4.4.2. ISPA The Pre-Accession Structural Instrument provided funding to transport and environmental

projects in all the CEE countries since early 2000s, along the same lines as the Cohesion Fund

designed for the lower-income EU members. The program had two main objectives:

• To help candidate countries to catch up with EU environmental standards;

• To upgrade and expand their links with the trans-European transport networks

ISPA provided an overall financing of 1,040 million EUR per year or 7,280 million EUR for the

whole period of 2000-2006. The objective was to have an equal division of the budget between

the two sectors, i.e. 520 million EUR per year per each of them13. Generally the rate of the

Community assistance14 granted under ISPA might be up to 75% of the public or equivalent

expenditure, including expenditures of bodies whose activities are undertaken within an

administrative or legal framework by virtue of which they are regarded as equivalent to public

bodies (the European Commission could propose to increase this rate to up to 85%, in particular

where it was required for achieving ISPA’s general objectives). Table 13 presents the actual

distribution of ISPA funds across areas and countries according to Commission’s official reports

(a more detailed breakdown is provided in Appendix 2, Table A2.2).

13 A breakdown by country of actually provided ISPA funds and the total estimated project costs are provided in Appendix 2, Table A2.1. 14 According to the official statement of the Commission, the available ISPA funding for all EU candidate countries was distributed according to size of population, GDP per capita, and the specific needs of the country.

37


Table 13. Distribution of overall ISPA support (including national contribution) over 2000-2004, EUR million

Country Environment Transport Technical assistance / EDIS Bulgaria* 507.7 947.9 11.7 Czech Republic 373.4 440.0 4.4 Estonia 129.3 86.0 24.0 Hungary 550.7 627.2 15.3 Latvia 178.5 230.2 26.5 Lithuania 214.9 288.0 18.3 Poland 2,047.3 1,695.5 60.4 Romania* 1,301.1 1,621.9 44.6 Slovakia 304.8 313.9 18.8 Slovenia 90.4 74.3 3.4

* - for Bulgaria and Romania the period covered is 2000-2006

Source: European Commission, own summary and calculations

4.4.3. SAPARD In the beginning of 2000, the European Union reinforced its pre-accession assistance for the

rural development by creating the Special Accession Program for Agriculture and Rural

Development (SAPARD). Financial support provided under this program was intended to assist

the countries to make structural improvements of their agricultural and rural environment in

anticipation of joining the EU. In particular, the European Union provided financial support to

improve product processing, marketing and observation of the quality standards in the

agricultural sector in order to help EU candidates meeting the requirements of several EU

policies and objectives (see Table 14).

Table 14 Total SAPARD commitments by countries, 2000-2004, EUR million Country Total commitmentsBulgaria 286.8Czech Republic 92.8Estonia 51.0Hungary 160.0Latvia 91.9Lithuania 125.4Poland 709.4Romania 791.2Slovakia 76.9Slovenia 26.7

Source: European Commission staff working document, annex to the SAPARD annual report, 2004, own summary and calculations

38


4.4.4. Estimation of total harmonization cost in the CEE countries Table 15 summarizes numbers analyzed in the previous three subsections, and presents the

total amount of resources allocated in different harmonization areas in the EU accession

countries (these are also the main areas that are expected to be harmonized in the ENP

countries to the degree identified earlier in this section).

Table 15. Total EU support to the CEE countries by area, EUR million

Country Administrative capacity *

Internal market

Agriculture **

Transport ***

Energy and

nuclear safety

Environment ****

Employment, social affairs and health

Bulgaria 373.7 - 286.8 947.9 756.3 507.7 480.3Czech Republic 370.2 48.6 92.8 440 26.3 373.4 491.4

Estonia 109.7 48.6 140.8 86 - 177.9 32.1Hungary 751 81.9 284.3 698.3 8.8 632.6 97.9Latvia 88.9 57.9 107.1 230.2 12.7 178.5 32.4Lithuania 85.2 29.5 198.7 297.6 376.2 235.6 11.9Poland 661.8 228.0 1,075.0 1,695.5 - 2,177.0 1,639.2Romania 286.9 29.9 791.2 1,621.9 13.6 1,410.0 1,179.1Slovakia 52.3 27.8 106.3 313.9 278.6 317.9 117.6Slovenia 29.8 44.7 26.7 74.3 7.0 90.4 98.2* PHARE support + technical assistance provided under ISPA ** PHARE + SAPARD support *** PHARE + ISPA support **** PHARE + ISPA support

Source: Own summary and calculations

Obviously, the financial assistance provided in these areas represents only a part of the total

harmonization costs in the CEE countries. It is mainly related to projects and programs carried

out and (co-) financed by the public sector and, to a very limited extent, represents the cost of

compliance with EU technical standards and requirements of the private sector (as part of the

overall harmonization costs). Therefore, the estimated amount of resources has to be adjusted

in order to account for a wider spectrum of costs, which we do by comparing the volumes of EU

financing with the volume of total investments in the areas where estimates on the total

investments are available – environment and transport (see Table 10). Based on the comparison

of the total costs and the EU financial support, an average cost/support ratio is calculated and

subsequently applied to all sectors.

39


Table 16. Comparison between costs of compliance with EU standards according to different studies in the environmental and transport sectors and EU financial support programs in the same area, EUR millions

Country EU

environmental support

Environmental costs -

average of all studies

Environmental cost/support

ratio

EU support in transportation

Transport costs – average

of all studies

Transport cost/support

ratio

Bulgaria 507.7 12,200 24.0 947.9 5,300 5.6Czech Republic 373.4 9,950 26.6 440 - -

Estonia 177.9 2,950 16.6 86 - -Hungary 632.6 9,250 14.6 698.3 - -Latvia 178.5 1,850 10.4 230.2 - -Lithuania 235.6 1,990 8.4 297.6 - -Poland 2177 31,600 14.5 1,695.5 - -Romania 1410 23,900 17.0 1,621.9 18,300 11.3Slovakia 317.9 4,800 15.1 313.9 3,500 11.2Slovenia 90.4 2,120 23.5 74.3 - -Average 17.1 9.4Sources: CEPS, IFW, ICPS, European Commission, CEN, BAS, NPAA Slovakia, EIR, IIASA, The World Bank, Table 10, own summary and calculations

There is significant difference between the costs that were covered by the EU pre-accession

financial instruments in the environmental and transport domain and the total cost of compliance

as estimated in different studies. Undoubtedly the EU assistance (and related national co-

financing) covered only part of the cost resulting from harmonization efforts in the CEE

countries. Unfortunately, due to lack of appropriate studies and information, the cost/support

ratio in the remaining areas cannot be estimated. One possible solution is to take the average

ratio as estimated for the environmental and transport domain and to assume that it is similar in

all other areas. Although there is a risk of under- or overestimation of the harmonization costs in

the CEE countries (i.e. of the ENP countries as well), given the existing information limitations,

we consider it appropriate. Table 17 provides estimates of the harmonization cost in the EU

accession countries calculated according to the above-described approach15.

15 For the purpose of adjustment we used the arithmetic average of the transport and environmental cost/support ratio (13.25)

40


Table 17. Estimated total harmonization costs in the CEE countries by main area, EUR millions

Country Administrative capacity


Energy and

nuclear safety


Bulgaria 4,951.5 - 3,800.1 5,308.2 10,021.0 12,200 6,364.0Czech Republic 4,905.2 644.0 1,229.6 4,136.0 348.4 9,950 6,511.1

Estonia 1,453.5 644.0 1,865.6 808.4 - 2,950 425.3Hungary 9,950.8 1085.2 3,767.0 6,564.0 116.6 9,250 1,297.2Latvia 1,177.9 767.2 1,419.1 2,163.9 168.3 1,850 429.3Lithuania 1,128.9 390.9 2,632.8 2,797.4 4,984.7 1,990 157.7Poland 8,768.9 3,021.0 14,244.0 15,938.0 - 31,600 21,719.0Romania 3,801.4 396.2 10,483.0 18,328.0 180.2 23,900 15,623.0Slovakia 693.0 368.4 1,408.5 3,515.7 3,691.4 4,800 1,558.2Slovenia 394.9 592.3 353.8 698.4 92.75 2,120 1,301.2

Source: Own calculations

4.5. Estimation of harmonization costs in the ENP countries To enable cross-country comparisons, the next step is to calculate these amounts as a

percentage of the total or sectoral value added. The analysis of funds’ allocation to the CEE

countries has not allowed detecting any clear and economically justifiable rule of distribution.

The only exception is the relationship between the nominal GDP or the value added and the

average annual allocation of resources – the higher nation’s income, the more projects has been

contracted, yet not proportionately and not in all the cases.

We assume that the volume of the financial resources needed for harmonization is proportional

to the level of GDP (or value added in particular sectors). In other words, the larger the size of

the economy is, more financial resources is needed for improvement and compliance with EU

standards and technical requirements. On the other hand, the larger the economy and the

greater the need for compliance in production in absolute terms, the more infrastructure and

administrative capacity is needed to facilitate and administer the flows of goods, services and

capital as well as the administrative paperwork. This also means higher demand for resources to

achieve a certain level of harmonization.

On the basis of the above conclusions we calculated the harmonization costs in the CEE

countries as a percentage of their total value added (in the agricultural and energy sector as a

percentage of their sectoral value added) and then we use the average ratios in each area for

41


estimation of the harmonization costs in the ENP countries, given the full integration effort is

undertaken. Subsequently in the last step, all results are adjusted for the limited degree of

harmonization (coefficients presented in Table 11).

Table 18. Cost of institutional harmonization in the CEE countries, % of total value added or sectoral value added for 2001

Area BG CZ EE HU LV LT PL RO SK SI CEE average

Adm. capacity 36.6 7.8 23.5 19.4 14.0 9.4 4.6 9.3 3.3 2.0 13.0Internal market - 1.0 10.4 2.1 9.1 3.2 1.6 1.0 1.7 3.0 3.3Agriculture 209.6 50.4 642.3 141.1 375.6 307.5 147.5 174.8 140.9 62.3 225.2Transport 39.2 6.6 13.1 12.8 25.8 23.2 8.4 44.9 16.5 3.6 19.4Energy 296.3 1.8 - 0.9 11.5 167.4 - 1.4 60.9 1.6 54.2Environment 90.2 15.9 47.7 18.0 22.0 16.5 16.7 58.6 22.6 10.8 31.9Employment and social affairs

47.0 10.4 6.9 2.5 5.1 1.3 11.5 38.3 7.3 6.6 13.7

Note: For total, agriculture and industry value added in the CEE and ENP countries see Appendix 3

Source: UNCTAD, Table 17, own calculations

Table 19. Total cost of full institutional harmonization of the ENP countries according to the CEE average levels by areas, USD million

Area Armenia Azerbaijan Belarus Georgia Moldova Russia Ukraine Administrative capacity 586.0 1,517.4 3,335.9 794.3 324.7 87,193 9,470.1Internal market 148.8 385.2 846.8 201.6 82.4 22,134 2,404.0Agriculture - limited 2,068.9 2,616.1 6,128.7 2,797.4 936.8 81,787 21,356.8Transport 874.5 2,264.4 4,978.1 1,185.3 484.5 130,120 14,132.3Energy 1,070.1 3,915.5 5,450.9 786.4 323.9 139,975 12,751.3Environment 1,438.0 3,723.4 8,185.7 1,949.0 796.7 213,959 23,238.2Empl. and social affairs 617.6 1,599.1 3,515.5 837.0 342.2 91,888 9,980.1Total 6,803.8 16,021.1 32,442.0 8,551.1 3291.1 767,055 93,333.0

Source: UNCTAD, Table 18 (last column), own calculations

Table 20. Cost of limited harmonization of the ENP countries, USD millions Area Armenia Azerbaijan Belarus Georgia Moldova Russia Ukraine

Administrative capacity 263.7 682.8 1,501.1 357.4 146.1 39,237.0 4,261.5Internal market 81.8 211.9 465.7 110.9 45.3 12,174.0 1,322.2Agriculture - limited 310.3 392.4 919.3 419.6 140.5 12,268.0 3,203.5Transport 262.4 679.3 1,493.4 355.6 145.4 39,036.0 4,239.5Energy 749.1 2,740.8 3,815.6 550.5 226.7 97,983.0 8,925.9Environment 575.2 1,489.4 3,274.3 779.6 318.7 85,584.0 9,295.3Empl. and social affairs 61.8 159.9 351.4 83.7 34.2 9,188.8 998.0Total 2,304.3 6,356.5 11,821.0 2,657.3 1,056.9 295,469.0 32,246.0

Source: Tables 11 and 19, own calculations

42


As evident from Table 20, institutional harmonization as envisaged in the ENP Action Plans is

not going to be without cost for the Eastern neighboring countries – both the public and private

sector will have to make a variety of adjustments and thus incur certain costs. Not surprisingly

due to its size, Russia is expected to incur the highest costs. Belarus also needs to make

relatively large investments in all sectors since not much was done in the country in the last

decade in terms of internal institutional improvement, trade liberalization and openness of the

economy. Unlike environment, transport and energy issues, relatively small amounts of funds

are expected to go for reforms of the employment and social systems in the neighboring

countries due to limited number of commitments bilaterally agreed between them and the EU.

With regard to the first three areas indicated in the table – administrative capacity, internal

market and agriculture – certain overlap among them is expected since, for example, food safety

of agricultural products is also an internal market issue or improved administrative capacity shall

also lead to easier market access through more efficient surveillance and control mechanisms.

43


5. Conclusions ENP countries’ institutional harmonization is going to be carried out in the context of the

approximation to EU norms and practices in a variety of areas like transport, energy and

environmental infrastructure, public procurement and property rights, sanitary and phytosanitary

requirements in agriculture, nuclear safety, telecommunication, etc. In this respect, both the

public and the private sector is expected to make certain adjustments, thus incur various costs

(positive effects have been studied in Maliszewska, Orlova and Taran, 2009). Based on the

experience of the accession countries we made an attempt to estimate these costs (considering

them as investment) and the needed financial resources, including national and international aid,

to cover them. It is to be emphasized that perfect and unquestionable methodology for

measurement of harmonization or transition costs does not exist, mainly due to their complex

and interconnected character. Theoretically, there are instruments like the impact assessment

that could allow exact measurement of harmonization costs, yet such estimations have to be

made at least at a sector level and are not appropriate for large-scale studies, due to the

necessity of disaggregated assessment, highly detailed data and deep knowledge on the

analyzed areas.

We identified two other ways of estimating the potential harmonization costs – survey-based and

extrapolation. Within the present study, conducting country-tailored questionnaires at least at a

sector level was not foreseen, which made the application of this approach impossible. On the

other hand, extrapolation of average costs for CEE countries’ harmonization to estimate the

potential harmonization costs for the neighboring countries based on internationally comparative

macroeconomic indicators like sectoral and total value added, was generally possible. This

involved estimating the EU pre-accession support for the CEE countries by main areas as a

percentage of the total or sectoral value added, determining the expected degree of limited

harmonization in the ENP countries and estimating “coefficients of limited harmonization”, which

we subsequently used for adjustment of the estimated cost of full harmonization.

44


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Appendixes Appendix 1. PHARE financial support by countries and area as published in the official documents of the Commission Table A1.1 PHARE commitments, contracts and payments by country, 1990 – 2004, EUR millions

Area Commitments Contracts Payments Average annual commitmentsBulgaria 1,792.15 1,313.36 1,120.22 128.0Czech Republic * 1,013.24 845.86 788.87 72.4Estonia 337.44 268.96 254.42 24.1Hungary 1,462.59 1,341.13 1,174.57 104.5Latvia 410.84 330.82 313.30 29.3Lithuania 797.0 750.53 654.92 56.9Poland 3,930.96 3,292.59 2,856.95 280.8Romania 2,723.40 1,860.11 1,559.37 194.5Slovakia * 817.39 700.70 605.40 58.4Slovenia 351.64 278.49 255.64 25.1Multi-country programmes 230.49 231.82 228.88 1191.3Total 16,677.50 13,395.73 11,573.29 128.0

* The funds provided to former Czechoslovakia (EUR 230 millions) are equally divided between the Czech Republic and Slovakia

Source: European Commission, own summary

Table A1.2 Distribution of PHARE support provided to the countries of the last two enlargements in 2001 and 2003

Distribution of PHARE support provided to Bulgaria, EUR millions

Area 2001 % of total 2003 % of

total Average

% Political criteria 6.55 4.2 - - 2.1Administrative capacity 14.88 9.7 49.5 30.7 20.2Internal market - - - - -Agriculture - - - - -Transport - - - - -Energy and nuclear safety (incl. nuclear decommissioning) 70.0 45.8 61.9 38.5 42.2

Environment - - - - -Employment, social affairs and health 48.31 31.6 35.3 21.9 26.8Justice and Home Affairs - - - - -Statistics - - - - -Regional policy / Community programmes - - - - -Total 152.8 160.9


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Distribution of PHARE support provided to the Czech Republic, EUR millions Area 2001 % of total 2003 % of total Average %

Political criteria 3 4.4 1.0 1.0 2.7 Administrative capacity 35.1 51.9 19.6 20.2 36.1 Internal market 6.5 9.6 - - 4.8 Agriculture - - - - - Transport - - - - - Energy and nuclear safety (Incl. nuclear decommissioning) 2.2 3.3 1.8 1.9 2.6

Environment - - - - - Employment. social affairs and health 13.6 20.1 74.6 76.9 48.5

Justice and Home Affairs - - - - - Statistics - - - - - Regional policy / Community programmes 7.2 10.6 - - 5.8

Total 67.6 97.0


Distribution of PHARE support provided to Estonia, EUR millions

Area 2001 % of total

2003 (n/a)

% of total

Average %

Political criteria - - - - - Administrative capacity 6.7 25.4 - - 25.4 Internal market 3.8 14.4 - - 14.4 Agriculture 7 26.6 - - 26.6 Transport - - - - - Energy and nuclear safety (incl. nuclear decommissioning) - - - - -

Environment 3.8 14.4 - - 14.4 Employment, social affairs and health 2.5 9.5 - - 9.5 Justice and Home Affairs 0.6 2.3 - - 2.3 Statistics - - - - - Regional policy / Community programmes 1.3 4.9 - - 4.9 Total 26.35 39.5


Distribution of PHARE support provided to Hungary, EUR millions


total Average

% Political criteria 9 9.9 - - 4.9Administrative capacity 28.1 30.9 70.9 69.7 50.3Internal market 9.16 10.1 - - 5.6Agriculture - - 17.3 17.0 8.5Transport 9 9.9 - - 4.9Energy and nuclear safety (incl. nuclear decommissioning) 1.05 1.2 - - 0.6

Environment 9.16 10.1 - - 5.6Employment, social affairs and health 6.9 7.6 5.9 5.8 6.7Justice and Home Affairs 9.16 10.1 7.7 7.6 8.9

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total Average

% Statistics - - - - -Regional policy / Community programmes 9.16 10.1 - - 5.5Total 90.85 101.7


Distribution of PHARE support provided to Latvia, EUR millions


total Average

% Political criteria 2 6.0 5.3 11.6 8.8Administrative capacity 5.4 16.3 6.3 13.8 15.2Internal market 9 27.1 0.5 1.1 14.1Agriculture - - 2.9 6.3 3.7Transport - - - - -Energy and nuclear safety (incl. nuclear decommissioning) 1.75 5.3 0.4 0.9 3.1

Environment - - - - -Employment, social affairs and health 2.2 6.6 4.2 9.2 7.9Justice and Home Affairs 10.57 31.9 5.9 12.9 22.4Statistics - - - - -Regional policy / Community programmes 2.23 6.7 17.2 37.6 22.2Total 33.15 45.7


Distribution of PHARE support provided to Lithuania, EUR millions

Area 2001 % of total 2003 % of total Average %

Political criteria - - - - -Administrative capacity 9.25 9.0 6.4 7.8 8.4Internal market - - 6.0 7.3 3.7Agriculture 3 2.9 12.6 15.4 9.2Transport 2.4 2.3 - - 1.2Energy and nuclear safety (incl. nuclear decommissioning) 59.5 57.7 30.0 36.6 47.2

Environment - - 4.3 5.2 2.6Employment, social affairs and health 3 2.9 - - 1.5Justice and Home Affairs 4.8 4.7 11.6 14.1 9.4Statistics - - - - -Regional policy / Community programmes 4.4 4.3 - - 2.2Total 103.2 82.0


Distribution of PHARE support provided to Poland, EUR millions


total Average

% Political criteria - - - - -Administrative capacity 45.46 11.0 78.9 19.6 15.3Internal market 33.75 8.2 13.5 3.4 5.8Agriculture 32.92 8.0 42.5 10.6 9.3

50



total Average

% Transport - - - - -Energy and nuclear safety (incl. nuclear decommissioning) 1.45 0.4 - - -

Environment 21.91 5.3 5.0 1.2 3.3Employment, social affairs and health 169.96 41.2 169.5 42.1 41.7Justice and Home Affairs 49.7 12.0 57.5 14.3 13.2Statistics - - - - -Regional policy / Community programmes 42.3 10.3 36.0 8.9 9.6Total 412.5 402.8


Distribution of PHARE support provided to Romania, EUR millions


total Average

% Political criteria 27 10.8 34.9 13.4 12.1Administrative capacity 18 7.2 27.4 10.5 8.9Internal market 5.6 2.2 - - 1.1Agriculture - - - - -Transport - - - - -Energy and nuclear safety (incl. nuclear decommissioning) 2.45 1.0 - - 0.5

Environment 20 8.0 - - 4.0Employment, social affairs and health 109.25 43.5 112.0 43.0 43.3Justice and Home Affairs 20 8.0 - - 4.0Statistics - - - - -Regional policy / Community programmes 41.44 16.5 79.8 30.6 23.4Total 251 260.6


Distribution of PHARE support provided to Slovakia, EUR millions

Area 2001 % of total 2003 % of total Average %

Political criteria 10 14.6 8.9 10.8 12.7Administrative capacity 1.8 2.6 4.6 5.6 4.1Internal market 3.7 5.4 1.3 1.6 3.4Agriculture - - 5.9 7.2 3.6Transport - - - - -Energy and nuclear safety (incl. nuclear decommissioning) 25.8 37.7 25 30.5 34.1

Environment - - 2.6 3.2 1.6Employment, social affairs and health 18.4 26.9 1.6 1.9 14.4Justice and Home Affairs 1 1.5 8.7 10.6 6.1Statistics - - 2.9 3.5 1.8Regional policy / Community programmes 7.3 10.7 20.7 25.2 17.9Total 68.5 82.1


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Distribution of PHARE support provided to Slovenia, EUR millions


total Average

% Political criteria - - - - -Administrative capacity 3.52 15.0 - - 7.5Internal market 2.15 9.1 6.4 16.3 12.7Agriculture - - - - -Transport - - - - -Energy and nuclear safety (incl. nuclear decommissioning) 0.15 0.6 1.3 3.3 2.0

Environment - - - - -Employment, social affairs and health 3.5 14.9 16.0 40.8 27.9Justice and Home Affairs 9.3 39.6 12.2 31.1 35.4Statistics - - - - -Regional policy / Community programmes - - 3.3 8.4 4.2Total 23.5 39.2


Table A1.3. Average distribution of PHARE support across areas as % of country’s total Area/Country BG CZ ES HU LV LT PL RO SK SL

Political criteria 2.1 2.7 - 4.9 8.8 - - 12.1 12.7 -Administrative capacity 20.2 36.1 25.4 50.3 15.2 8.4 15.3 8.9 4.1 7.5Internal market - 4.8 14.4 5.6 14.1 3.7 5.8 1.1 3.4 12.7Agriculture - - 26.6 8.5 3.7 9.2 9.3 - 3.6 -Transport - - - 4.9 - 1.2 - - - -Energy and nuclear safety (incl. nuclear decommissioning) 42.2 2.6 - 0.6 3.1 47.2 - 0.5 34.1 2.0

Environment - - 14.4 5.6 - 2.6 3.3 4.0 1.6 -Employment, social affairs and health 26.8 48.5 9.5 6.7 7.9 1.5 41.7 43.3 14.4 27.9Justice and Home Affairs - - 2.3 8.9 22.4 9.4 13.2 4.0 6.1 35.4Statistics - - - - - - - - 1.8 -Regional policy / Community programmes - - 4.9 5.5 22.2 2.2 9.6 23.4 17.9 4.2

Source: Own calculations

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Appendix 2. ISPA financial support by countries and area as published in the official documents of the Commission Appendix A2.1 Total support under ISPA provided to the CEE countries, including national contribution, 2000-2004 (Bulgaria and Romania, 2000-2006)

Country Estimated total costs EU contribution Bulgaria 1,467.3 1,055.5 Czech Republic 817.8 506.4 Estonia 239.3 180.4 Hungary 1,193.0 656.1 Latvia 435.2 310.2 Lithuania 521.2 283.1 Poland 3,803.2 2,587.3 Romania 2,970.6 2,470.9 Slovakia 637.5 362.1 Slovenia 168.1 86.5

Source: European Commission, own summary

Table A2.2 Distribution of ISPA support provided to the CEE countries across areas

Distribution of ISPA support, provided to Bulgaria and the Czech Republic, EUR million Bulgaria* Bulgaria** Czech Republic

Area Eligible cost % of total Eligible

cost % of total Eligible cost % of total

Environment 355.0 34.6 507.7 34.6 373.4 45.7Transport 663.6 64.6 947.9 64.6 440.0 53.8Technical assistance / EDIS 8.2 0.8 11.7 0.8 4.4 0.5

Total 1 026.8 1 467.3 817.8

* 2000-2004, ** 2000-2006


Distribution of ISPA support, provided to Estonia, Hungary and Latvia, EUR million Estonia Hungary Latvia

Area Eligible cost

% of total

Eligible cost

% of total

Eligible cost

% of total

Environment 129.3 54.0 550.7 46.2 178.5 41.0Transport 86.0 35.9 627.2 52.6 230.2 52.9Technical assistance / EDIS 24.0 10.0 15.3 1.3 26.5 6.1

Total 239.3 1 193.2 435.2


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Distribution of ISPA support, provided to Lithuania, Poland and Romania, EUR million Lithuania Poland Romania*



Environment 214.9 41.2 2 047.3 53.8 851.3 43.8Transport 288.0 55.3 1 695.5 44.6 1 061.5 54.6Technical assistance / EDIS 18.3 3.5 60.4 1.6 29.9 1.5

Total 521.2 3 803.2 1 942.7

* 2000-2004


Distribution of ISPA support, provided to Romania, Slovakia and Slovenia EUR million Romania** Slovakia Slovenia



Environment 1 301.1 43.8 304.8 47.8 90.4 53.8Transport 1 621.9 54.6 313.9 49.2 74.3 44.2Technical assistance / EDIS 44.6 1.5 18.8 2.9 3.4 2.0

Total 2 970.6 637.5 168.1

** 2000-2006


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Appendix 3. Total and sector value added in the CEE and ENP countries Gross value added at basic prices and current exchange rates in the CEE countries

YEAR 2001 2001 ECONOMY INDICATOR % EUR, mil Bulgaria Total Value Added 13,528.20 13,528.20 Agriculture 13.4% 1,812.78 Industry 25.0% 3,382.05 Services 61.6% 8,333.37Czech Republic Total Value Added 62,591.50 62,591.50 Agriculture 3.9% 2,441.07 Industry 31.5% 19,716.32 Services 64.6% 40,434.11Estonia Total Value Added 6,180.30 6,180.30 Agriculture 4.7% 290.47 Industry 22.7% 1,402.93 Services 72.6% 4,486.90Hungary Total Value Added 51,346.60 51,346.60 Agriculture 5.2% 2,670.02 Industry 25.6% 13,144.73 Services 69.2% 35,531.85Latvia Total Value Added 8,395.30 8,395.30 Agriculture 4.50% 377.79 Industry 17.50% 1,469.18 Services 78.00% 6,548.33Lithuania Total Value Added 12,058.80 12,058.80 Agriculture 7.10% 856.17 Industry 24.70% 2,978.52 Services 68.20% 8,224.10Poland Total Value Added189,334.40189,334.40 Agriculture 5.10% 9,656.05 Industry 22.50% 42,600.24 Services 72.40%137,078.11Romania Total Value Added 40,794.60 40,794.60 Agriculture 14.70% 5,996.81 Industry 30.50% 12,442.35 Services 54.80% 22,355.44Slovakia Total Value Added 21,274.60 21,274.60 Agriculture 4.70% 999.91 Industry 28.50% 6,063.26 Services 66.80% 14,211.43 Slovenia Total Value Added 19,573.50 19,573.50 Agriculture 2.90% 567.63 Industry 29.60% 5,793.76 Services 67.50% 13,212.11

Source: Eurostat, own summary and calculations

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Total value added and value added in agriculture, industry and services sector in the ENP countries, USD in current prices, millions

Economy Indicator 2005 Armenia Total Value Added 4,507.71 Agriculture 918.69 Industry 1,974.36 Services 1,614.65Azerbaijan Total Value Added 11,672.22 Agriculture 1,161.68 Industry 7,224.13 Services 3,286.41Belarus Total Value Added 25,660.55 Agriculture 2,721.44 Industry 10,057.04 Services 12,882.07Georgia Total Value Added 6,109.83 Agriculture 1,242.20 Industry 1,450.86 Services 3,416.77Moldova Total Value Added 2,497.48 Agriculture 415.99 Industry 597.51 Services 1,483.97Russia Total Value Added670,717.70 Agriculture 36,317.30 Industry 258,255.70 Services 376,174.70Ukraine Total Value Added 72,847.08 Agriculture 9,483.50 Industry 23,526.32 Services 39,837.27

Source: UNCTAD, Handbook of Statistics

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